What is with all the waving we do at the end of Zoom calls? Should we start waving as we back out of the room for in-person meetings in the future? By the same token, many banks are baffled by what to do with the Main Street Lending Program (MSLP), as this is not something we would do in normal times. Yet, we found ourselves both participating and waiving at the end of those MSLP Zoom calls. No matter if your bank is going to participate in MSLP or not, understanding the risk involved is a master class in loan structuring and credit.
The future path of the economy is currently unpredictable. Still, the majority of banks have now eliminated two possible scenarios: 1) Best case scenario – that nothing will change from February 2020; and 2) Worst case scenario – that the pandemic will not end in the foreseeable future and banks should avoid loans and invest in riskless securities.
While we discussed our framework for deciding WHEN to call bank employees back to the branch lobbies and workplace (HERE), in this article, we cover HOW. The two decisions are interrelated since the sooner you look to reopen, the more risk you take, and the more resources you have to invest in a reopening plan.
If we are going to “reopen America,” it helps to have a quantitative approach to make sure we are making the right decision. Since we are dealing with people’s lives and livelihood, this will be the most critical decision that most of us will ever have to make in their entire professional careers. Everyone wants to get America back to normalcy and recall our employees back to the workplace, but the debate is over when.
Go to any Trader Joe's market and then go to a competing market, and you will be likely to find a significant difference. Trader Joe's has produced a COVID-19 response that is thoughtful, practical, relatively inexpensive, and caring.
The Fed did more than cut rates on Sunday; they pumped a massive amount of liquidity in the system, sending a signal to banks to level up. Far behind the health of employees and customers in the COVID-19 pandemic, comes the economic impact. Unlike the recession of 2008, where the economic impact came over many months, this pandemic impacted businesses in weeks providing much less time to prepare and adjust. The result is likely to be bad for the economy and bad for banks. If your bank is treating this as businesses as usual, then you are putting your survival at risk.
There is now little doubt that the coronavirus will spread globally and will cause more supply and demand shocks in the market. While economic activity will slow, the amount and duration of the slowdown are big unknowns. Community banks may not have exposure to Chinese markets and may not have significant exposure to the energy sector.
When we talk about unforeseen Black Swan events, the COVID-19 virus fits the profile. It has come out of nowhere, taken lives, disrupted public health, altered our daily lives, causing financial market volatility, caused more than five standard deviations of movement in interest rates and likely to have a material impact on credit markets. This isn’t business as usual and for this uncharted territory, you might find this playbook helpful.